Filing business taxes is generally pretty easy, but bookkeeping, saving your invoices, and tracking your expenses can take a lot out of you. If you’re not familiar with how to file your taxes as a self-employed individual, we recommend using the following tips to maximize your returns.
Question You Should Ask Before Filing Self-Employment Taxes
While it’s true that filing self-employment income taxes is quite simple, that doesn’t mean you won’t experience a learning curve. Here’s what you should know to file taxes as a freelancer.
1. How Do You Pay Taxes as a Freelancer?
Unlike filing taxes as an employee, self-employed contractors have to manage their entire tax burden themselves. The self-employed tax rate includes 12.4% for Social Security and 2.9% for Medicare, totalling 15.3%. Freelancers also have to pay income tax based on their income.
You can use this KeeperTax tool for calculating taxes if you’re new to self-employment tax. Not only does this tool calculate both of your tax rates, but it also determines if you need to pay quarterly taxes. This is helpful, considering the IRS won’t inform you when you need to do this.
2. What Forms Should I Use for My Taxes?
Freelancers won’t use a W-2 to file their taxes. Instead, you’re required to fill out a Form 1040 (SE) for your individual income tax return. You’ll also need Schedule C (Profit and Loss from Business), which is located on Form 1040 (SE), and with Schedule F (for farming).
You will also receive multiple 1099-NEC forms from your clients, which your clients will also send to the IRS. You don’t need to send an extra copy to the IRS. The 1099-NEC is used to prove the amount of money you made over the year, so you’ll need them for your records.
3. How Do I Open a Business Bank Account?
All businesses, whether they’re sole-proprietors or single-member LLCs, should open a business bank account. By doing this, you’ll keep your business transactions separate, build business credit, confirm to vendors you’re serious, and save time and money at tax time.
Unless you register your business, all of your income will increase your tax burden. However, if you open a separate business account and become an LLC, you can keep most of your income inside your company. This method can help you stay in a lower tax bracket throughout the year.
4. How Much Should I Budget For Tax Season?
Most freelancers will save 25-30% of their total income to ensure they can settle up their taxes at the end of the year. If you keep up with your bookkeeping, you should know how much to save and what estimated quarterly taxes are due (if your taxes exceed $1,000 in a year).
Since estimating your quarterly payments requires more diligence, try to update your income ledger each month. If you filed self-employment taxes in the past, take the taxes you paid the previous year and divide that number by 4. That should give you an estimate of what you owe.
5. How Can I Deduct My High Tax Burden?
Self-employed individuals can deduct their home office, health insurance premiums, education, vehicle mileage, phone and internet costs, advertising, and more to reduce their tax burden. They can also cash in on various personal deductions, such as medical-based spending.
To save on taxes and put money towards retirement, you can transfer some of your income into a 401(k). Any money placed into select retirement savings accounts won’t be taxed until you withdraw. Plus, your money will continue to earn interest up until the age of retirement.
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